Texas economic outlook is strong but substantial obstacles remain

Ray Perryman

Published 6:20 am, Wednesday, July 18, 2012

Texas is forecast to continue to outperform the nation through the long-term horizon. The Lone Star State fared much better than most of the United States during the recession, and currently faces lesser problems in term of unemployment and housing market conditions. Recently, the state's economy has continued to improve and unemployment rates have decreased, although they remain undesirably high in a few parts of the state.

A long-term economic forecasting perspective requires a slightly different focus, with emphasis on factors that are more fundamental to growth such as demographics, education and the changing industrial base. Texas is facing substantial challenges in some of these areas, while others are improving the state's outlook.

The Texas housing market avoided the worst of the national downturn, and many areas are now approaching sales at levels historically supported by population expansion. Foreclosures are down and permits are increasing. Inventories of homes for sale are also falling. Another source of strength is oil and gas exploration and development. Rig counts have been trending well over 900, with activity in both long-established fields (such as those in the Permian Basin) and more recent finds (such as the Eagle Ford Shale in South Texas). Technological improvements have both increased total recoverable amounts and enhanced economies.

Most of the current growth in production of natural gas has come from shale formations such as the Barnett Shale in the Metroplex area and the Eagle Ford Shale (which also has substantial oil reserves). These fields are emerging as a crucial component of the nation's natural gas supply, and estimates of the total potential U.S. supply from shale sources is rising rapidly as new fields are discovered and explored. While low gas prices are limiting new drilling at the moment, market patterns will change over the long-term horizon. Drilling for oil remains strong.

For the areas in close proximity to fields, the economic stimulus is particularly strong. Exploration and production involve huge capital investments, thousands of jobs, and millions in royalty payments. Although the Texas economy has diversified to the point where it is less tied to energy than in the past, oil and gas related activity will remain a notable source of economic stimulus for the foreseeable future.

Recent locations and expansions are also working to position Texas for future growth. A number of sizable investments in the state have substantial potential for synergistic development. The Caterpillar manufacturing facility in Victoria, technology firms such as Apple in Austin and the Metroplex, and many others will generate opportunities in the decades to come.

In spite of the good economic news for Texas, there remain substantial obstacles to continued success. Global and national issues can curtail the state's future performance. The debt crisis in Europe (and elsewhere), the "fiscal cliff" the United States is facing, and other sources of uncertainty pose threats to Texas' expansion.

The State budget situation is another cause for concern. Insufficient investment in needed infrastructure could stifle future expansion, as problems such as traffic congestion decrease the state's competitiveness for attracting corporate locations. The fundamental imbalances in State revenues and expenses must be addressed in a meaningful way or prosperity will ultimately be threatened. Another major challenge for the Lone Star State is educational attainment, but that's a topic for another day.

Balancing the strengths and challenges, The Perryman Group's latest forecast calls for reasonable expansion through the long-term forecast horizon. Compound annual growth in output (real gross product) during the 2011-2040 timeframe is expected to be 3.3 percent, which translates to expansion of more than $1.8 trillion. The information, durable manufacturing, and services sectors are projected to exceed a 3.9 percent compound annual rate of growth in output over the period.

Employment is forecast to increase at a 1.59 percent compound annual rate, with total gains of almost 6.4 million jobs. Sectors expected to see the largest numbers of new positions over the next three decades include services (projected to add some 3.9 million net new jobs) and wholesale and retail trade (up almost 876,000). The information sector is likely to see compound annual employment growth of more than 1.6 percent, while several others expand at a rate greater than 1 percent.

In conclusion, the Texas economy continues to recover from the recent recession, with notable job gains and improvement in the housing market. There are also positive trends at work, such as resurgence in traditional sources of business activity and major locations in emerging industries. At the same time, the Lone Star State must deal with key infrastructure and education issues or future economic performance will be jeopardized.

The Perryman Group's forecast calls for growth over an extended time horizon, though business cycles are inevitable. The state remains well positioned compared to most areas, and has the potential to see even better performance with meaningful solutions to fiscal and other issues.

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Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.